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The Wave Principle and “The Panic of 1907”

Have you ever heard of “The Panic of 1907”? Before the Great Depression of 1929-1933, 1907 was known as one of the worst years in the history of the stock market. Needless to say nobody saw it coming when the Dow Jones Industrial Average climbed above the 100 dollar mark for the first time in January 1906. Everyone thought that this milestone is a sign of future prosperity and the uptrend was expected to continue. However, the Market does not care about opinions and expectations. Prices reached as high as $103 and then started declining. During the rest of 1906 people were disappointed, but not scared… yet. Then came 1907 and the massive sell-off, which wiped out almost half of Dow Jones’ value. In the late 1907 prices finally formed a bottom at $53, thus ending a period of time, which would later be known as “The Panic of 1907”.
the panic of 1907
But you could probably read all that in any history book. Why are we telling you about it? We will get to that soon. First let’s take a look at a chart, which would visualize the price action during the whole period we are talking about.
the panic of 1907 unlabeled
The chart shows the 3-year rally from $42 in 1903 to $103 in 1906, as well as The Panic of 1907. To the untrained eye, this is all the chart shows and nothing more. But it offers a lot more to the experienced Elliott Wave analyst.
Ralph Nelson Elliott published “The Wave Principle” in 1938 – more than 30 years after The Panic of 1907. Now, in 2014, we can see, that if his theory was to be applied in 1906, it could have saved investors a lot of money by preventing them from buying at the top. Below you will see the same chart, but this time with an Elliott Wave labeling.
the panic of 1907 labeled
Note that the 1903-1906 bull market has a perfect five-wave impulsive structure. The sub-waves of wave (3) are also clearly visible. According to the Elliott Wave Principle, every five-wave sequence is followed by a correction in the opposite direction. After every crisis or market crash there are speculations about the reasons, which led to the catastrophe. This was the case in 1907 as well. Opinions vary from market manipulations to money deficits, but to Elliotticians, The Panic of 1907 is nothing more than a natural market correction.

So, if you were an investor in January 1906, who knows how to apply the Elliott Wave Principle, what would you be – a bull or a bear?

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